15 March 2012 9:54 PM

You have to hand it to George Osborne. He knows how to capture a headline even when he is in Washington in the company of the Prime Minister.

His eye-catching proposal for the Government to cash in on low interest rates and its current, coveted ‘AAA’ credit rating by issuing 100-year bonds, to help fund the Coalition’s borrowing needs, looks extraordinarily seductive.

Certainly, there are few other, if any nations in the world, that would attempt such a trick. The bonds - packages of government debt - are designed to lock in the benefits of historic low interest rates.

Britain is able to revive a scheme not used since World War I because it is alone among the world’s richest country in that it has, never - even after nearly bankrupting itself fighting two world wars - reneged on its debt.

Nevertheless, one cannot help but feel that this whole enterprise is at best displacement activity and at worst a gimmick.

What’s more, Osborne’s initiative to devise a new long-term form of borrowing also sends out a very worrying message. Instead of keeping his focus on restoring the country’s finances, by shrinking the size of government, it suggests that he is happy to mortgage our long-term future, disgracefully leaving the problem of deficits and debt to future generations.

In terms of investment, what both consumers and pension funds really need in the current economic are index-linked bonds (which keep ahead of the rising cost of living) that help to preserve their capital - not some glossy new financial instrument.

The truth is that governments issue bonds (known in Britain as ‘gilt edged stock’) in order to please two sets of people.

First, the Government itself, which is raising money to meet its borrowing needs or to invest in some great new infrastructure project such as the new high-speed rail link to the North. The second section of people it is trying to please are any investors in the new bond (be they an insurance company or a foreign government) who are simply seeking a secure and safe home for their money.

The reality is that while the Coalition government has been able to borrow money on the foreign financial markets in order to help tackle the budget deficit and reduce the £1 trillion debt mountain left by New Labour, ordinary household savers, pensioners and future retirees have experienced a rotten time.

This is largely due to the fact that, for the past three years, the Bank of England has kept interest rates at the record low level of 0.5 per cent while, at the same time, with the permission of the Treasury has engaged in a policy of printing extra money (so-called ‘quantitative easing’.)

The intention of this was to prevent the financial system from freezing up, to stop banks from collapsing and to get the economy moving again.

But by pumping £325 billion of extra cash into the financial markets – largely by allowing the Bank of England to buy up gilt edged stock – the Government has shamefully neglected the needs of savers.

Of course, anyone with mortgages has greatly benefited from a period of low interest rates. But savers - there are seven (itals) times as many deposit accounts as home loans according to official figures - have been battered.

In effect, savers have been punished for being prudent.

For example, firms providing pensions for their staff are running up far bigger deficits than anticipated because the future value of retirement packages is calculated by using the interest rate on gilts – which has been at its lowest in living memory.

Similarly, employees yet to reach retirement age and who are seeking to buy an annuity (the income for life received in exchange for the sum built up in a defined contribution pension pot) when they retire, face getting far lower returns than they had a right to expect.

The amount of money being lost is immense. The campaign Save our Savers estimates that people holding cash in banks, building societies and National Savings have lost £71 billion in interest payments as a result of a prolonged period of low interest rates.

Their losses will be much more if you take into consideration how rising inflation (late last year consumer prices were rising at 5 per cent) will have eroded the value of their capital investment.

Those people with private sector pensions are among the many being hit.The National Association of Pension Fund (NAPF) estimates that there has been a widening in the shortfall in company pension funds of £91 million.

This is one of the reasons why big firms, such as Tesco, have raised their pension age from 65 to 67 to reduce the huge financial burden of paying for the 293,000 people in its scheme.

Given this background it comes no major surprise that the NAPF is disparaging about the Chancellor’s plans to issue a 100-year bond.

Its chief executive, Joanne Segars, argued that the bond ‘would be too long for most pension funds, and we don’t think people would buy them.’Instead, she believes that most pension funds are looking for 30-year, 40-year and 50-year index linked bonds which would protect retirement funds against the ravages of inflation.

In any case, the history of 100-year bonds isn’t that glorious - as proved by the War Loan, a very similar instrument, that was set up after World War 1 to help pay off Britain’s huge debts.

The loan is still outstanding, and forms part of the national debt. Andrew Bell, chief executive of the huge Witan Investment Trust, calculates that £100 invested in the War Loan just under a century ago is now worth just £2.

So this experience suggests that such deals are very good for governments, which gain funding on the cheap, but are lousy for those patriotic individuals and investment institutions who buy into them.

If the Chancellor was really serious about doing something positive to encourage a culture of saving in this country, there are a number of steps that he could take which could contribute to the public finances (like the 100-year bonds) but at the same time give a decent financial return.

For example, he could let the National Savings & Investment (which is an arm of the Treasury) offer the public far bigger amounts of index linked investment – in the form of bonds and savings accounts.

Each time the NS&I offers such bonds they are avidly snapped up. But then the Treasury invariably tends to reduce the supply or stop making them available at all because high street banks usually complain that the high rates of interest offered by the NS&I are undercutting their own schemes.

Such a situation is utterly perverse. If bankers really want to give their customers with savings accounts decent returns on their investments, they should do so and not whinge about unfair competition.

Similarly, as the National Association of Pension Funds has suggested, the Treasury could issue index linked gilts, attractive both to UK and overseas buyers, over periods up to 50 years. Such a shorter term would better match the lifetime of the longest contributing pensioners.

Finally, the Chancellor could use next week’s Budget to increase the incentive to save, by dramatically raising the upper limit for savers who invest in tax-free individual savings accounts (ISAs).

These have been an enormously popular form of saving. But this government has only raised the upper limit each year in line with inflation.

With the public finances showing some signs of improving more quickly than expected (by some calculations the Chancellor may have £10bn more than was originally predicted to play with) he could compensate savers for the sacrifices they have made by boldly raising these limits.

Crucially, this would have the beneficial effect of attracting more deposits, boosting the share values of companies and help them invest in Britain’s future.

Don’t hold your breath, though, because so far this Coalition government has treated savers and pensioners with contempt.

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